Many of today’s issues are impacting the future of life insurance product design.
For instance, by Jan. 1, 2009, reserves for all newly issued life policies must be calculated using the 2001 Commissioners Standard Ordinary mortality tables. The same tables will be required for tax reserve calculations but starting a year earlier on Jan. 1, 2008. Thus, many insurers are targeting that date for marketing their new 2001 CSO products.
Some product managers are concerned that state insurance departments will be overwhelmed with new filings in 2007. So, they are preparing to get their products off to an early start on the design/filing path.
In fact, some companies already have filed and are marketing their 2001 CSO products for term life and whole life insurance products. Moving to 2001 CSO generally benefits the profitability of both products because of the lower reserves. The actual product design is not affected except for possibly having lower WL cash values.
Universal life and variable universal life products are impacted the most–not only their reserves but also the guaranteed cost of insurance rates and the guideline premiums are lower. Therefore, companies generally have waited to file and market their 2001 CSO UL products (except some policies with lifetime secondary guarantees, which the new mortality table allows to have lower reserves).
Efforts to develop a principles-based reserving system appear to be rounding the base paths quickly, though admittedly there is more ground to cover. These changes will also lower reserves in many instances. But more aggressively priced products with long-tail risks (such as UL with secondary guarantees) may actually have higher reserves under the new methodology, particularly in the early policy durations.
Term insurance will probably have the biggest reduction in reserves. It will be interesting to watch how the major players in this market respond to those changes.
Principles-based reserves represent a move away from formula-based approaches, relying instead on company experience and, for some products, stochastic analysis across scenarios. This will pose significant practical challenges for some, not only in implementing the new standards for financial reporting but also for product development, which must contemplate reserves expected into the future.